A large cap stock is a stock issued by a company whose market capitalization is much larger than most of the companies traded on the same stock exchange.
Large cap is a phrase used to describe companies with a large market capitalization, the dollar value its traded shares.
Investors use the term large cap to differentiate them from small cap and mid cap stocks. Large cap stocks usually well-established and large industrial, technology, consumer goods and drug companies.
Large cap on the U.S. stock exchanges signifies a market cap of well over $10 billion, though this number changes over time and is subject to interpretation by investment firms.
It’s important to note that not all companies trade shares on public exchanges and the percentage of shares traded compared to total shares can vary. Thus it can be misleading to use market capitalization to deduce the actual size of any given company.
When investors say they own only “quality” or “blue chip” investments, they often mean that they own mostly large cap stock investments. They think of these investments as being high quality because typically to reach that size a company has to outlast a large number of competitors.
That doesn’t mean a large cap stock cannot lose value or that the company those shares represent cannot go bankrupt. It only means that the company has a longer record of recording successful profits and revenue growth and has a well-established brand or industry niche.
Investors do not expect a large cap stock to grow dramatically in a short period of time. Rather, they count on these investments to deliver steady growth and, in many cases, a strong dividend.
Dividends are your share of the company profits. Many large cap stock firms find that they cannot reinvest their incoming capital very well. The industry is too crowded or the company is not optimized for research and development.
In that case, the company instead gives cash back to shareholders to reward them for remaining invested in a slower-growing firm or industry. A positive change in the value of the stock added to the dividend is known as total return.
Most big mutual funds own a broad selection of large cap stocks. Likewise, owning an S&P 500 index fund provides exposure to the largest 500 companies in the United States. By design, you own what is essentially a large cap stock fund just by owning the index.
Large cap stock investments are an important part of a prudent long-term retirement portfolio. Owning them through a low-cost stock index fund provides investors with the kind of growth promised by stocks without the riskier effort of trying to choose among them.